Infrastructure Projects The “Road” ahead: What will keep Corporate and Disputes Practice busy in 2024

• Author(s): Ravi Singhania, Shilpa Shah
• Date: 06-Jan-2024
• Post in: Infrastructure

The Indian economy relies significantly on the infrastructure sector, serving as a crucial driver for overall economic growth and national development. It is poised to play a vital role in achieving India's ambitious target of becoming a USD 5-trillion economy. The year 2023 has been pivotal for India's infrastructure, with expectations of a compound annual growth rate (CAGR) of 8.2% by 2027. The Indian Government has made substantial investments to modernize the aging infrastructure, aiming to transform the country into a self-sufficient economy with an increased global export share. Over the past few years, there has been a notable uptick in deal activity within the sector, experiencing a CAGR of nearly 16%. Road assets have predominantly been acquired by platforms and strategic investors, closely followed by financial investors. However, the Indian roads from infrastructure point of view has a few pitfalls such as LMPD, approval delays etc.

Yearly roundup for Roads segment in infrastructure projects

Examining recent legislative developments:

1. Amendment to National Highways Fee Rules (NHAI Fee Rules): On October 6, 2023, the Ministry of Road Transport and Highways (MoRTH) issued a notification modifying Rule 6 (6) (b) of the NHAI Fee Rules. The existing rule outlines the collection of user fees during and after the concession period under a concession agreement. Traditionally, the fee is reduced to 40% after the concession period. The reduced fee is applicable from the date of transfer of national highway, bridge, tunnel or bypass, as the case may be, from the concessionaire to the government. However, the recent notification specifies that, post-concession, the fee collected by the Government of India or its executing authority will adhere to the NHAI Fee Rules without an automatic reduction to 40%.
    
2. Vivad se Vishwas II – (Contractual Disputes) Scheme: Launched on May 29, 2023, by the Department of Expenditure, Ministry of Finance, Government of India, the Vivad se Vishwas II – (Contractual Disputes) Scheme aims to settle contractual disputes between government entities and private contractors. Depending on the dispute's category and stage, the government will provide a one-time settlement amount to the private contractor, subject to specific conditions outlined in the scheme. The scheme will apply to all domestic contractual disputes where one of the parties is either the Government of India or an organisation operating under its control. However, a notable absence in the provisions pertains to the modification of claims submitted by the Contractor. In cases of miscalculations or other discrepancies, the current structure lacks a mechanism for the Contractor to make adjustments to the claim without resorting to the writ court. This process is inherently time-consuming and may prove counterproductive for the overall efficiency of the Scheme. Despite the apparent straightforwardness of the Scheme, inherent intricacies could significantly impact the amounts recoverable by the Contractor.
    
3. Draft Motor Third Party Premium and Liability Rules, 2023-24: MoRTH, in collaboration with the Insurance Regulatory and Development Authority of India (IRDAI), released the Draft Insurance Rules on June 14, 2023. These propose base premium rates for motor vehicle third-party insurance. The draft suggests discounts such as a 15% discount for buses serving educational institutions, a 50% discount for vintage private cars, a 15% discount for electric vehicles (EVs), and a 7.5% discount for hybrid EVs.
    
4. All India Tourist Vehicles (Permit) Rules, 2023: Issued on April 18, 2023, by MoRTH, these rules supersede the All India Tourist Vehicles (Authorisation or Permit) Rules, 2021. According to the Tourist Vehicles Rules, an All India Tourist Permit is exclusively granted to tourist vehicles operated by tourist vehicle operators. The application process and fee payment, based on vehicle capacity, must be completed electronically through the relevant state transport authority's portal. Notably, battery-operated tourist vehicles and those running on methanol or ethanol fuel will be issued an All India Tourist Permit without any associated fee. Scope and Validity:
   1. Applicability Nationwide: The permit is valid throughout India, making it applicable across all regions of the country.
       
   2. Intended Use: The permit is specifically designed for the transportation of tourists either individually or in groups along with their luggage.
       
   3. Mandatory Requirement: To engage in the transportation of tourists, a valid permit must be obtained. Without the issuance of a permit, a vehicle is not authorized for the purpose of transporting tourists.
       
   4. These stipulations highlight the comprehensive reach of the permit, its designated purpose for tourist transportation, and the obligatory nature of obtaining the permit for such activities.

Judicial Developments:

Delhi High Court's Position on Arbitral Award Challenges:

The Delhi High Court, in the case of National Highways Authority of India v Trichy Thanjavur Expressway Ltd (Trichy), has clarified that under Section 34 of the Arbitration and Conciliation Act, 1996, the court lacks the authority to modify an arbitral award. Instead, it can surgically set aside separable portions of the award. This clarification, while not a novel concept, gains significance in light of the Supreme Court's decision in NHAI v. M. Hakeem. The Delhi High Court's ruling aims to strike a balance between minimal court intervention in arbitral awards and preventing the loss of an entire award due to a partial defect. The prospect of losing an entire arbitral award due to a partial defect is a feared outcome for those holding the award. The recent judgment from the Delhi High Court provides clarity on the practice of selectively setting aside awards in India. The court has successfully struck a balance, ensuring minimal court intervention in arbitral awards while preventing an injustice. This ruling establishes a measured approach to address flaws without jeopardizing the entire award, thus promoting fairness in the arbitration process.

Supreme Court's Stance on Arbitral Tribunal Decisions:

In a judgment dated August 24, 2023, in Hindustan Construction Company Limited v. National Highways Authority of India, the Supreme Court addressed a series of appeals concerning the interpretation of a contractual condition. The court emphasized that when an arbitral tribunal, consisting of technical experts in the relevant subject matter, provides a plausible interpretation of a technical contract condition, courts should refrain from applying a corrective lens. The limited grounds stipulated in Section 34 of the Arbitration Act for setting aside arbitral awards should be strictly adhered to. This approach aims to uphold the sanctity of arbitration proceedings, especially in cases where technical expertise is crucial.

National Highway Authority of India v. TK Toll Pvt Ltd:

The High Court examined whether the Arbitral Tribunal's failure to acknowledge the significance of the Standstill Agreement (SA), wherein parties agreed not to raise claims related to project delays, constituted a bar on claims. The court noted evidence presented by the Contractor's expert witness, attributing a delay of 1668 days to NHAI for not handing over the project site and a 300-day delay to the Contractor. The court observed that the Contractor might not have overlooked NHAI's delay unless there was pressure to sign the SA. Lately, there has been a rising trend in the execution of supplementary agreements, which frequently curtail contractors' options to seek damages. The control wielded by state-backed authorities over elements like time extensions and the imposition of liquidated damages often puts contractors in a position where they have little choice but to comply with these requirements. This ruling aptly acknowledges the evident power asymmetry in such scenarios and moves towards reinstating the legal and contractual rights of contractors. It's important to highlight that the assertion of coercion and/or duress needs to be substantiated based on the specific facts of each case.

Business Development Overview:

• In the Union Budget 2023-24, the Railway Ministry secured an unprecedented budgetary support of Rs 2,40,000 crore, a record amount that is nearly nine times higher than the allocations made in 2013. This substantial financial injection aims to bolster railway infrastructure in the country. The introduction of new Vande Bharat trains is a focal point, prioritizing safety enhancements and asset replacements such as tracks, bridges, and locomotives. Notably, ambitious projects like the bullet train and the proposed India-Middle East-Europe economic corridor are expected to attract significant capital investment, potentially transforming the sector as a long-term growth driver. As of December 7, 2023, 68 new Vande Bharat trains have been launched, aligning with the government's plan to operate 400 such trains. Additionally, a Rs 2,800 crore plan is underway to develop 35 hydrogen fuel cell-based trains for heritage hill routes, promoting sustainable growth in the railways sector.
   
• In the infrastructure space, a noteworthy transaction involves the Adani Group securing a USD 1.5 billion term loan facility from the State Bank of India for the Navi Mumbai International Airport. This loan, one of the largest project financing loans from the State Bank of India, is anticipated to contribute to the airport's operational status in early 2024.
   
• Another significant development is the Asian Development Bank providing a unique financing package to GreenCell Express Private Limited for the development of 255 electric battery-powered buses on 56 intercity routes in India. This project stands out for achieving a 2x gender financing rating, aligning with the G7 summit's 2018 challenge to encourage gender lens investing among development finance institutions.
   
• The Government of India has launched key programs such as GatiShakti, Bharatmala, and Sagarmala, focusing on infrastructure development in roads, railways, and ports. Efforts are underway to attract private capital and implement administrative reforms to streamline infrastructure investments. The National Infrastructure Pipeline (NIP), with an expected investment of approximately US$650 billion, serves as a significant lever in this context.
   
• In the realm of high-impact projects, 81 projects have been identified under India's Gati Shakti Programme, signaling a commitment to fast-track infrastructure development. The National Highways Authority of India (NHAI), a wholly-owned subsidiary of the National Highways Logistics Management Limited (NHLML), has executed a concession agreement for the development of a Multi-Modal Logistics Park (MMLP) in Bengaluru on a public-private partnership basis under the Design Build Finance Operate Transfer (DBFOT) model, with a concession period of 45 years.
   

Challenges and Opportunities in Project Finance:

• Addressing 'Late Materials or Product Delivery' (LMPD) stands out as a primary concern for project finance lawyers. LMPD often leads to claims and disputes, with triggers stemming from factors such as the contractor's responsibility, divergence from realistic execution timelines, improper scheduling, inaccurate materials estimation, and delayed order placements. To mitigate these challenges, it is crucial for legal practitioners to establish internal guidelines during both the pre-execution and execution stages. This includes scrutinizing supplier credibility and supply channels at the tendering stage, as well as reviewing key provisions related to materials approval, price escalation, cost adjustment, time extension, and liquidated damages.

In the Indian legal landscape, when LMPD is solely attributable to the contractor, contractual and legal remedies may be available to the employer. Standard form contracts used by government agencies, like the National Highway Authority of India (NHAI) or the Central Public Works Department (CPWD), often prescribe liquidated damages for contractor-attributable LMPD. These damages are typically calculated as a percentage of the contract amount and applied periodically up to a specified delay cap. Contractual exposure for LMPD includes potential impacts such as non-receipt of milestone-linked payments, encashment of contractor's bank guarantees, or even contract termination, depending on the severity of the delays.

Under Indian law, contractors may also be liable to pay damages for LMPD. The Indian Contract Act, 1872 codifies the award of damages, aiming to place the non-defaulting party in the same position if the contract had been performed. Damages are quantified based on the provisions under Sections 73 and 74 of the Act.

• Another significant challenge in construction projects involves delays caused by the complex approval process. The Indian construction sector is heavily regulated by various national and state laws, rules, and regulations. Delays in obtaining approvals related to designs, materials, change orders, payments, inspections, safety, subcontractors, and completion can impede project progress. Employers' delays in providing these approvals are typically addressed through mechanisms such as extensions of time, compensation or damages, and the right to termination in favor of the contractor.
   

Concluding Remarks

In conclusion, construction disputes present complex challenges, particularly in terms of Delay Mapping and unforeseen Extra Items during project execution. Policy framers need to address issues such as time-bound land acquisition and clearances to avoid delays in government-run projects. Additionally, effective implementation of the National Logistics Policy requires close coordination between central and state governments. A multi-dimensional approach is necessary to navigate the intricate landscape of construction-related challenges in project finance. Speaking of which, while the Vivad se Vishwas is a much lauded scheme, it has its own set of ambiguities bringing the question, “to apply for settlement or to not apply?”. The definitions of a Court Award and an Arbitral Award within the current framework exhibit a certain degree of ambiguity, particularly in relation to the inclusion of Arbitral Awards under challenge. The term Court Award encompasses situations where parties have 'approached the courts,' while an Arbitral Award comprises awards that 'may be under challenge.' This dual inclusion raises interpretational uncertainties and necessitates a closer examination to ensure clarity and consistency within the legal framework.

Given these complexities, it becomes imperative for legal counsels representing Contractors to provide comprehensive legal guidance. This includes a thorough review of the viability of pursuing a settlement under the Scheme, meticulous calculations of the awarded amount at the claim filing stage, assessment of the Procuring Entity's offer, preparation of a well-crafted withdrawal application seeking liberty to revive the petition if the settlement falters, scrutiny of the terms within the settlement agreement, and strategies for enforcing the agreement in case of breach by the procuring entity. These legal considerations are vital to safeguarding the interests of the Contractor and navigating potential challenges that may arise throughout the settlement process.